MARKET WATCH: Gas rebounds, crude declines in New York

Natural gas prices rebounded with a 9.2% gain Sept. 18, wiping out the previous session’s loss and ending the week up 27% while the strengthening dollar caused crude prices to retreat for the second consecutive session on the New York market.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Sept. 21 -- Natural gas prices rebounded with a 9.2% gain Sept. 18, wiping out the previous session’s loss and ending the week up 27% while the strengthening dollar caused crude prices to retreat for the second consecutive session on the New York market.

“Crude continues to see strong resistance around the $72-73[/bbl] range. Furthermore, options markets are pointing to future declines in crude, as investors are now paying record prices to protect against large declines in oil prices,” said analysts in the Houston office of Raymond James & Associates Inc. Both natural gas and crude were down in early trading Sept. 21, with oil prices slipping below $71/bbl.

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The high volatility seen in the front-month natural gas [on the New York Mercantile Exchange] is somewhat indicative of a bottoming process. It is possible that natural gas will continue to rally until Sept. 28, the date that the United States Natural Gas Fund said it would resume issuing shares. A technical break of the $4 level could force the remaining shorts to cover.”

They said, “There is a growing consensus in the market that it will become increasingly difficult and expensive to build oil reserves in the future. These growing concerns are an additional factor that will provide support for the oil price.”

Front-month benchmark US light, sweet crudes climbed above $72/bbl last week, “testing for the second time in 4 weeks the upper boundary of the price range established in early August,” said analysts at the Centre for Global Energy Studies, London. “At the start of the week crude prices rose on positive economic news and a sharper-than-expected fall in US inventories. However, across the world product stocks remain high,” they said. “The oil price rally, however, came to an end Sept. 18 as concerns over the strength of the global economic recovery resurfaced. The world economy is still seen as being vulnerable to rising unemployment.”

At KBC Market Services, a division of KBC Process Technology Ltd. in Surrey, UK, analysts observed the latest Department of Energy data on total US oil products demand in the week ended Sept. 11 were up 55,000 b/d from the same week in 2008. “The size of the increase is not particularly noteworthy: what should have us reaching for our cigars is the fact that this is the first increase in the weekly year-on-year comparison since Jan. 18, 2008. In view of the generally improving mood, this must surely be taken as a harbinger of better times ahead, although we are not completely out of the doldrums,” they said.

A weekly gasoline comparison showed the third increase in a row, “something we have not seen since the Christmas Holiday in 2007.” KBC analysts said, “Even jet kerosene, for which year-to-date demand in 2009 is more than 10% down vs. last year, registered a tiny increase in the Sept. 11 data. The blot on the landscape remains distillate, for which demand remains stubbornly weak: this is significant because of diesel’s widespread use throughout the economy. This weak distillate picture is replicated elsewhere in the Old World (Europe and Japan). Another sign telling us that we should be careful to pronounce the recession really over is in sales of natural gas to industry. In the US they remain 11% down on last year.”

They added, “KBC Market Services remains confident that [crude] prices will move gradually up to $75/bbl later in the year and should average $80/bbl in 2010.” They also expect production by nations outside the Organization of Petroleum Exporting Countries to continue to rise, “albeit slowly,” until 2019. “If there is more investment in OPEC countries—a big ‘if’—then fears of a major supply crunch are probably misplaced,” analysts said.

CGES analysts said oil is unlikely to sustain a move above $70/bbl until concerns about the strength of the global economic recovery are laid to rest and oil product stock overhangs start to fall. “Equally, hopes of a sustained global economic recovery would need to be dashed in order for oil to drop again much below $65/bbl,” they said.

High inventories, particularly of middle distillates, “are putting a ceiling on oil prices at the moment, though, and this will only lift once those inventories start to be drawn down,” said CGES analysts. “Middle distillate inventories in 20 key countries, plus product held in floating storage, have ballooned to more than 740 million bbl over recent months, but demand for the products that make up this category, particularly diesel and jet fuel, is closely tied to economic activity, and stocks may not fall far until that activity picks up,” they said.

Pritchard Capital Partners noted, “In recent weeks the natural gas industry has intensified its efforts to lobby Congress on the merits of natural gas and its future role in the Obama Administration energy plan. Two recent studies were released that showed: 2.8 million jobs were attributable to the natural gas industry, the industry contributed $385 billion to the economy in 2008, and $180 billion in labor income. There is some discussion that the natural gas industry may lobby Congress to pass a bill that would replace the 50 dirtiest coal plants with cleaner-burning natural gas plants.”

Energy prices
The October contract dropped 43¢ to $72.04/bbl Sept. 18 on the New York Mercantile Exchange. The November contract lost 45¢ to $72.49/bbl. On the US spot market, WTI at Cushing, Okla., was down 43¢ to $72.04/bbl. Heating oil for October delivery declined 1.3¢ to $1.83/gal on NYMEX. Reformulated blend stock for oxygenate blending (RBOB) for the same month retreated 1.88¢ to $1.83/gal.

The October contract for natural gas escalated 32¢ to $3.78/MMbtu on NYMEX. On the US spot market, however, gas at Henry Hub, La., dropped 33¢ to $3.16/MMbtu.

In London, the October IPE contract for North Sea Brent lost 23¢ to $71.32/bbl. Gas oil for October was down $7.75 to $579/tonne.

The OPEC office in Vienna is closed Sept. 21, so there was no update on prices for OPEC’s basket of 12 benchmark crudes.

Contact Sam Fletcher at samf@ogjonline.com.

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